What to Look For in Genco's Earnings

Genco Shipping & Trading  (NYSE: GNK  ) and its publicly traded subsidiary Baltic Trading  (UNKNOWN: BALT.DL  ) will each report earnings on Thursday, Nov. 5, along with their respective conference calls. This will be a week after Navios Maritime Partners (NYSE: NMM  ) reports its earnings, hopefully giving us some insight into the future state of the dry-shipping environment. Let's prepare for the future by reviewing the past earnings reports and conference calls.

Pay attention to Navios Maritime Partners and what its management has to say. In its last call, it referred to the industry as "brightening." For the first time in four years, Navios VP of Business Development George Achniotis predicted that industry demand would exceed supply. Take note of whether the company is still on board with that opinion, and what other comments its management has about the future.  The better the outlook or continued positive outlook, the better it is for Genco.  

Likewise, listen to the Baltic Trading Limited conference call for its managers' insights into the future. They do a great job of describing the trickle-down effect in rates for ships from biggest to smallest. Last quarter, Baltic Trading executive Apostolos Zafolias stated, "...we continue to believe that incremental capacity of ore from the major miners will positively affect demand for the transportation of commodities over a 5-year period." Take note if management's opinion has changed.  If Baltic Trading turns more pessimistic in its outlook, it will not bode well for its Genco parent. 

Genco Shipping & Trading specifically
Genco's entire fleet operates based on the daily spot rates for all four sizes of its ships. Since spot rates were up significantly during the third quarter, we know going in that the cash coming in the door will likewise be up significantly. However, there's one major issue in particular with Genco Shipping & Trading that investors need to laser focus on in its report and conference call: its debt situation

Genco Shipping & Trading has bad debt problems that could sink its fleet if not resolved. Its lenders have previously given it multi-month extension waivers.

In the last earnings release, Genco didn't mention anything about the debt problems. However, in the conference call, CFO John C. Wobensmith stated: "...we need to sit down and speak to our lenders because we're going to have some issues in the first quarter, potentially, with covenants and amortization. As I said in the last call, those conversations are ongoing. I don't really have a specific update at this point."

In other words, it has payments coming due, and Genco doesn't expect to have the cash to pay it. 

The key date that's approaching is March 31, 2014, when the current waivers expire. Genco admits in its filing that it is "probable" that it will be in debt noncompliance violation on a number of items. In the 10-Q filing with the SEC, Genco revealed that it's in discussions with its lenders, hoping for a waiver or modification. If Genco fails to achieve one or the other, it could trigger a domino effect that might even lead to bankruptcy, and wipe out shareholders' stock in the process.

Focus on what management has to say about how the debt negotiations are going, or whether they've found a new lender to refinance. Improving business fundamentals increase the odds of the lenders being "friendly." Highly dilutive terms or outright refusal to bend on the lenders' part are potential risks that could hurt the stock price severely.

Additionally, take note of Genco's industry outlook, and compare it to that of Navios Maritime and Genco's subsidiary, Baltic Trading.  The more companies with the same outlook as Genco, the more credible that outlook becomes. 

But at least until Genco Shipping & Trading gets its house in order, debt-wise, investors should remain on the sidelines.

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  • Report this Comment On November 01, 2013, at 3:06 PM, groupersaurus wrote:

    The run up in the indices started pretty late in the quarter. The rates GNK ships get don't start the day you see them posted, there is lag time of a couple of weeks. And the fleet is made up of several different classes of vessels, the rates of which did not move equally. Then there are the time charters in place in Q3 2012 that GNK did not have in place in Q3 2013 that were significantly higher than the Hadrian and the Constantine earned in the recent quarter. While the earnings will be up a bit Q over Q, they won't be up Y over Y for this quarter. And the increase won't be near as good as the move in the BDI that happened very late in Q3. Q4 will be better both Q over Q and Y over Y with rates being where they are now.

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